The Bank Of East Asia, Limited - 2010

MARC has assigned a financial institution rating of AAA to The Bank of East Asia, Limited (BEA). The rating reflects MARC's assessment of the bank's capacity to meet its financial obligations on the Malaysian national rating scale. The outlook on the rating is stable.

The rating incorporates BEA's established banking franchise in Hong Kong and mainland China, its very strong asset quality metrics, sound capitalisation and historically prudent risk appetite. It also takes into account the challenges posed by intense competition and regulatory pressures as well as the potential strain placed on management and capital resources by the continuing rapid growth of BEA's China operations.

Founded in 1918 as a family-owned bank, BEA is one of Hong Kong's oldest local banks and the fifth largest bank in Hong Kong by assets. The bank is listed on The Stock Exchange of Hong Kong. BEA has relied on organic growth and continued branch network investments to build its franchise in China where its presence dates back to 1920. BEA received approval to set up a locally incorporated bank in China in 2007. The locally incorporated bank, The Bank of East Asia (China) Limited (BEA China), currently operates the second largest distribution network in China among the locally incorporated foreign banks.

The growing contribution from its expanding franchise in China is expected to drive the bank's earnings momentum in coming years in light of the limited growth potential afforded by Hong Kong's mature market. In the financial year ended December 31, 2009 (FY2009), BEA's Hong Kong operations generated around 55% of the group's profit before tax (PBT), while mainland China operations contributed a noteworthy 45%. BEA continues to pursue its expansion in mainland China and expects equal revenue contributions from Hong Kong and mainland China over the medium term. An important rating implication of BEA's China-focused growth strategy would be the higher operating environment-related risks relative to its Hong Kong banking operations.

BEA's profitability rebounded strongly in FY2009 and showed further improvement during the first six months of FY2010 (1H2010). In 1H2010, BEA reported a consolidated net profit of HKD2,116 million compared to the preceding year corresponding period's HKD1,205 million (FY2008's full year net profit was HKD104 million). BEA's 1H2010 earnings performance has benefited from a marked improvement in impairment  losses  on loans  in addition to increases in net interest income and net fee  and commission income. The People's Bank of China's recent move to raise its benchmark interest rates by a quarter percentage point is likely to translate into near-term net interest margin improvements for BEA China, in common with other Chinese banks. At the same time, competitive pressures and BEA's higher-than-peer cost-to-income ratio are likely to constrain the magnitude of profitability improvements. MARC considers BEA's annualised return on assets (ROA) of 0.93% for 1H2010 to be satisfactory.

Whilst BEA's portfolio reveals concentrations in residential mortgages and commercial real estate lending, the bank's track record in managing its property-related credit exposures has been good. The bank sustained its strong asset quality metrics in FY2009 despite economic headwinds, as evidenced by its gross non-performing loans (NPL) ratio of 0.99% as at end-2009. MARC believes that asset quality pressures have eased, as indicated by a significant decline in impairment losses on loans and an improvement in its gross NPL ratio to 0.86% as of June 30, 2010. BEA China maintained its gross NPL at a respectable 0.19% as at end-June 2010; the Chinese economy had remained resilient despite measures by the Chinese authorities to cool the economy. The foregoing and BEA's tight credit underwriting standards mitigate concerns of renewed near-term asset quality pressures arising from a 'hard landing' for the Chinese economy or a major property market correction in one or both of its key markets.

BEA's funding stability is supported by a 5.8% growth in customer deposits in 2009 and a higher growth rate is expected in FY2010, underpinned by its strong banking franchise. However, its loan-to-deposit ratio increased to 76.7% at end-1H2010 from 71.7% at end-2009 as loan growth outstripped deposit growth. BEA’s capitalisation remains above the regulatory minimum, albeit somewhat lower than the Hong Kong banking sector average. BEA’s Tier-1 and total capital adequacy ratios stood at 10.3% and 13.8% respectively at end-1H2010; 12.6% and 16.2%, respectively for the Hong Kong banking sector. MARC believes that a strong capital base would be required to support BEA's strong organic loan growth and somewhat concentrated property exposures within its loan portfolio. MARC also notes that the bank appears to possess reasonably good access to capital market funding.

The stable outlook on the rating reflects MARC’s expectations that the bank would be able to successfully negotiate the challenges still inherent in its operating environment aided by its prudent risk management, adequate capitalisation and strong banking franchise.

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